Space Race in Chicago

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POAH Hurries to Preserve Lafayette Terrace

The clock started ticking in May 2014, when Preservation of Affordable Housing (POAH), an affordable housing developer with offices in Chicago, signed an agreement to buy Lafayette Terrace, an old, project- based Sec. 8 property on Chicago’s South Side.

The sale needed to close by the end of the year – that was a promise POAH made to the seller of the property.

To seal the deal on schedule, POAH needed the U.S. Department of Housing and Urban Development (HUD), to quickly approve changes to the existing financing for Lafayette Terrace. HUD would only agree to do that if POAH’s bridge loan to buy the property included some very unusual features. In addition, HUD had to agree to let the property continue to receive rents slightly above its local Fair Market Rents, which would allow a fuller renovation.

“It’s exactly the type of preservation deal that POAH likes to get involved with,” says Konrad Schlater, a project manager in the Chicago office of affordable development Preservation of Affordable Housing (POAH). “We like to have that complexity.”

Scattered Site
The first hint of trouble is that Lafayette Terrace is unusual in a way that may have given pause to HUD officials. The property includes two separate clusters of apartments located about a mile apart in Chicago’s Englewood neighborhood.

“HUD is not prone to do scattered site facilities,” says Tracy Peters, senior managing director of affordable housing for Red Capital Group, which arranged permanent HUD financing for the property

Built in 1983, Lafayette Terrace includes a six-story, mid-rise building with 52 apartments reserved for very-low-income seniors or disabled residents. Lafayette Terrace also includes 42 duplex townhouse apartments in seven buildings reserved for very low-income families. “It’s been managed as a scattered site property since 1983,” says Schlater. “The seniors and the family apartments have worked well together.”

The second hint of trouble was the stiff competition between affordable housing developers to buy and recapitalize Lafayette Terrace.

“There were many suitors,” says Schlater. To stand out from the crowd, POAH promised the seller, Security Properties, that it could close on the sale of Lafayette Terrace by the end of the year.

That is a bold promise to make, though the property was worth the risk, according to POAH. Strong demand for affordable housing and solid management over the years has helped Lafayette Terrace stay fully-occupied. The apartments also scored well on their HUD Real Estate Assessment Center exams. “It is a high-performing property,” says Schlater. “It was in great shape.”

Closing the sale
To fulfill its promise to the seller to close by the end of the end, POAH needed to arrange $6.8 million in bridge financing. POAH also needed to get HUD to agree to assign the property’s old Market-to-Market mortgage to the property’s new owners, since the old loan was still too large to simply pay off.

That posed a challenge.

HUD can allow a qualified nonprofit to assume this type of loan – but usually only after all the other pieces of a full recapitalization are already in place.

“The only way to make the deal work was to get HUD to assign it to a new borrower,” says Schlater. “We had to push HUD to do something that was outside of their comfort range.”

POAH also needed to secure a bridge loan to buy the property. Since permanent financing was not yet complete for the development, HUD insisted that this bridge loan needed to be structured like permanent financing – just in case. The loan needed a fixed interest rate and a 40-year term. “It is extremely unusual,” says Schlater.

And the money from the bridge loan needed to be available fast. “We had about a month to come up with $6.8 million,” says Schlater.

POAH applied to Local Initiatives Support Corp. on December 8. Less than a week later, LISC committed to provide a loan facility. By the end of the year, LISC had closed and dispersed the entirety of the loan amount.

Closing the gap
Even after POAH made the deadline, the developer had to work to finance a thorough renovation. POAH is spending about $5 million, or $55,000 per apartment, in hard construction costs to renovate Lafayette Terrace. “That is a big number to get to on a bond deal,” says Peters.

It cost a total of $26.3 million to complete the redevelopment. Of that, Red Capital arranged $6.9 million through a Federal Housing Administration 221(d)4 mortgage. The loan will be supported by federal project-based Sec. 8 rental subsidies. HUD allowed Red Capital to underwrite the FHA loan at the properties current Sec. 8 rent levels for the remainder of the housing assistance payment contract, even though those rents are above the official Fair Market Rents set by HUD by as much as $150 a month for some apartments.

Another $7.7 million came from the proceeds of tax-exempt bonds issued by the Illinois Housing and Development Authority, which also provided $1.7 million in soft financing.

Those tax-exempt bonds also came with a reservation of 4 percent low-income housing tax credits (LIHTCs). POAH sold the tax credits and an ownership stake in the property for $5 million, or about $1.01 per dollar of tax credit, to City Real Estate Advisors, a LIHTC syndicator based in Indianapolis, Ind.

“They came in very strong,” says Schlater. “We were very pleased.”

Work in progress
Workers started in July to replace roofs, windows and heating, ventilation and air conditioning units, along with new stairways and entrances for the buildings.

In the apartments, workers added sound proofing, new flooring and moderate energy efficiency upgrades. The kitchens are getting new cabinets and Energy Star-rated appliances. The bathrooms are getting new vanities and plumbing fixtures.

“We are setting for the next fifteen years,” says Schlater.

The work is going on while all the tenants continue to live in the fully-occupied buildings. “We go into each unit for about a week,” says Schlater. The renovation will be finished in February 2016.

POAH already operates several affordable housing communities in Chicago, and played a lead role in the redevelopment of 504 distressed affordable apartments in Grove Parc Plaza, in Chicago’s Woodlawn neighborhood. POAH’s property managers are already used to visiting its several buildings on Chicago’s South Side.

Lafayette Terrace is a long way from Chicago’s condominium neighborhoods. Englewood is plagued by poverty and high crime rates, though the buildings of Lafayette Terrace are located in relatively stable corners of the community.

“There is a huge need for affordable housing in that neighborhood,” says Schlater.